Kenya plans to enforce taxes on Google, Netflix, digital services

Kenya is now putting the final touches to plans to collect taxes on digital platforms like Google and Netflix. The proposed income tax law will see Kenya collect a 1.5% tax on the monies generated by these companies in the country. But how will they enforce the collection of tax revenues?

In line with the provisions of its Finance Act of 2019, Kenya, the economic powerhouse of East Africa is finalising plans to enforce taxes on digital platforms like Google and Netflix and on all online transactions.

According to the proposed change in the income tax law, digital companies that generate revenue in Kenya will pay a 1.5% tax on the value of transactions. This is in a bid to get revenue from tech firms that are mostly based outside Kenya.

Treasury secretary, Ukur Yatani, stated this as part of the country’s plans to fund its Sh3 trillion ($28 billion) 2020/2021 budget. He also released the Draft Value Added Tax (Digital Marketplace Supply) Regulations, 2020, as proposed guidelines for the taxation of the digital economy.

According to the draft, a 14% VAT will be charged on digital marketplaces such as eCommerce, online subscriptions, and other digital services that have been escaping the nation’s tax bracket. According to the Act, a digital marketplace is defined as,

“a platform that enables the direct interaction between buyers and sellers of goods and services through electronic means.” The draft extends the scope of this definition while leaving it open to interpretation in the future.

• Mobile applications, e-books, and movies
• News, magazines, journals, streaming of TV shows and music, podcasts, and online gaming;
• Software, drivers, website filters, and firewalls;
• Website hosting, online data warehousing, file-sharing, and cloud storage services;
• Supply of music, films, and games;
• Supply of search-engine and automated helpdesk services including supply of customised search-engine services;
• Tickets bought for live events, theatres, restaurants etc. purchased through the Internet;
• e-learning, including supply of online courses and training;
• Supply of digital content for listening, viewing or playing on any audio, visual, or digital media;
• Supply of services on online marketplaces that link the supplier to the recipient, including transport hailing platforms;
• Any other digital marketplace supply as may be determined by the Commissioner.

In light of this, digital platforms would have to register and remit VAT as well as income tax in Kenya.

The Kenya Revenue Authority (KRA) plans to do this by working with the Communications Authority of Kenya (CA) to obtain data on every resident and non-resident digital transaction that takes place in the country.

Plans for taxing the digital economy had long been in the works. In August 2019, we reported that the country was making plans to tax digital platforms that generate income in Kenya; a plan which Google followed with a warning that the country would risk trade war if it did.

When the Act came into effect in November 2019, it did not reveal the details of the execution, leaving it to the office of the cabinet secretary of the National Treasury.

Why enforce digital taxes?

The KRA stated that digital companies like Google and Facebook generate a lot of revenue from Kenya but do not pay any taxes. Also, several online businesses, both in and out of Kenya, do not remit VAT for their transactions.

These businesses usually have no physical structures or addresses from which they operate, making it easy to escape taxation. A scenario which several countries are coming to terms with but might find difficult to enforce.

The EU has made the most strides with the enforcement of digital taxes, and in the UK, being online or offline does not matter when registering for VAT.

Nigeria, in its Finance Act of 2020, also made provision for digital taxes, but it did not state elaborate enforcement plans. Besides the Finance Act, Nigeria has tried to place levies on online ads, and enforce VAT on digital services, but nothing has been made of it yet.

The argument for taxing the digital economy is the same in most countries of the world. Digital companies defy today’s decades-old tax laws and international trade agreements.

The current agreement under the Organisation for Economic Cooperation and Development (OECD), states that companies should pay tax where their goods/services are produced rather than where they are consumed.

But as we argued earlier, it is difficult to determine where value is being created for digital companies. Netflix has engineers in the US and partners with video production houses all over the world. Where then are Netflix’s services being produced?

Kenya’s peculiar case

With the outbreak of COVID-19, Kenya enforced a number of fiscal measures to help its citizens cope with the harsh economic realities that followed. These include:

• Reduction of Personal Income Tax top rate (PAYE) from 30% to 25%
• 100 % tax relief for persons earning up to Ksh. 24,000
• Reduction of Resident Corporate Income Tax rate from 30% to 25%
• Reduction of Turnover Tax rate for SMEs from 3% to 1%
• Reduction of VAT rate from 16% to 14%.
• Suspension of all listing for all persons including companies at Credit Reference Bureau (CRB).

Nevertheless, the government implemented these measures while searching for revenue streams as a lot of the country’s production process was disrupted.

As a result, the country is trying to widen its tax bracket on several fronts which also happens to include the introduction of digital taxes and the removal of tax-exempt status on goods and services.

The Finance Bill 2020 proposes a standard VAT rate on petroleum products, which might increase the price of fuel, and on raw materials used to make automotive and solar batteries (renewable energy).

VAT exempt status will also be removed in the energy, aviation, agriculture, and manufacturing sectors. Also, consider that Kenya plans to charge VAT on e-learning services when education is meant to have a VAT exempt status.

While Kenya’s plans might generate more revenue, the removal of VAT exempt status on important items might undo much of the relief and tax breaks the government has granted it’s citizens.

If Kenya implements digital taxes, it might also spark a trade war with the US, home to several tech giants, with possible negative effects for its citizens.

One must wonder if Kenya is casting a wide net in the hope of catching as much fish as it can, or if these are the early stages of a well-crafted masterplan.